Taxes » Tax Credits » FSA Saves Money, Cuts Taxes

Workplace benefits can not only provide you and your family with much-needed services, but some of them also can help cut your federal tax bill. One of the most popular benefits is a flexible spending account, often referred to as an FSA.

Companies typically offer two types of spending accounts. With a dependent-care FSA, an employee sets aside money to help pay for costs typically associated with putting the kids in day care so mom and dad can work.

But even more workers opt for a medical FSA, in which they can set aside money to pay for routine items such as health insurance copays, uninsured treatments such as vision care or even over-the-counter drug purchases.

In both cases, the money is taken out through regular, equal payroll deductions. In both cases, the FSA deductions come out of a worker's paycheck on a pretax basis. That means less of your earnings are subject to tax.

As helpful as these accounts are, they have one big drawback: the use-it-or-lose-it requirement that costs workers millions of dollars each year. The law requires workers to spend FSA contributions by the end of the company's benefit year, which in most cases is Dec. 31. Any leftover account amount is forfeited.

Claims deadline extended

In recent years, however, workers have received some relief here. Spending-plan participants now are allowed to make claims against their accounts for up to two months and 15 days after the end of their benefit year. This grace period means employees on a calendar benefit year now can use their prior-year FSA contributions for expenses incurred as late as March 15 of the following year.